AOL Time Warner, 2000Easy

The largest merger ever announced at the time, paid for in shares that were themselves the thing being valued — and written down two years later.

3 min read · 521 words

What happened

• January 2000 — an internet service provider and a media group announce a share-for-share merger. The internet company's shareholders are to hold the larger share of the combined group.
• The consideration is shares, so nothing is fixed in cash: what the media group's holders receive depends entirely on what the buyer's shares are worth when it closes and afterwards.
• Through 2000 and 2001 — the sector's share prices fall broadly. The transaction completes in January 2001.
• 2002 — the combined company records goodwill impairments of around $99 billion for the year, at the time the largest annual loss reported by a US company.
• 2009 — the two businesses are separated again.

The mechanism

• A share deal fixes a ratio, not a price. The premium quoted on announcement day is a statement about one moment; see the exchange ratio for why it moves every day afterwards.
• Goodwill is the arithmetic of the price paid. It is what the consideration exceeded the identifiable net assets — so a high price recorded in shares creates a large balance-sheet item that later has to be tested.
• An impairment is not a cash event. It restates a number that was created at closing; the cash was never paid, because the currency was equity.
• The synergy case has to clear the premium. The calculator on the M&A desk shows what annual synergies a premium requires — and what happens when they do not arrive.
• Nothing in the sequence needed a villain. A ratio agreed at one set of prices, an accounting standard applied as written, and a sector that repriced.

What it teaches

• Ask what currency is being used before asking what price is being paid. Cash transfers value; shares transfer a share of the outcome, including the buyer's own repricing.
• Read the contribution analysis, not the premium. What each side brings in earnings and cash flow against what it will own is the check a dissenting holder does first.
• A collar is the mechanism that would have bounded it — and negotiating one is a statement about which side expects the ratio to move.
• Goodwill is a promise recorded as an asset. Its size is a measure of how much of the case rests on things that were not on the balance sheet.

The mechanisms behind this

Every case on this site is an instrument or a mechanism doing exactly what it was built to do, in a situation nobody had pictured. These are the pages that explain the machinery:

• Exchange ratio — why a share deal fixes proportions rather than value.
• Synergies — what has to be true for a premium to be recovered.
• Merger of equals — the structure this was announced as.
• Accretion and dilution — the first test any share-funded deal is measured by.